A third form of tax relief for erroneous joint returns: equitable relief

In recent posts, we’ve been looking at potential avenues of relief available to spouses who come under IRS investigation based on a discrepancy in a tax filing. As we’ve noted, innocent spouse relief and separation of liability are exceptions to the general rule that spouses are both fully liable for misstatements on joint tax returns, but these forms of relief are only available when certain conditions are met.

A third avenue of tax relief that may be available to those who don’t qualify for either of the above is equitable relief. Both understatements and underpayments of taxes may be covered by equitable relief, whereas only tax understatements are potentially covered with innocent spouse relief and separation of liability.

Beyond not meeting the qualifications for other relief, there are a number of different conditions that must be met to qualify for equitable relief:

There was no transfer of assets as part of a fraud scheme or to avoid tax liability

The tax return was not filed with intent to commit fraud

It would unfair to hold the spouse liable for the understatement or underpayment

The tax liability for which relief is sought must be an item that can be attributed to the other spouse, with several exceptions

Generally, tax must not have been paid, but relief by way of refund may be provided up to a limit if the spouse seeking relief can show the tax was paid with his or her own separate payments.

The IRS takes into account a variety of factors when determining whether equitable relief is appropriate in any given case. One of these factors, in cases involve underpayments of tax, is whether the spouse seeking relief knew or had reason to know that the payment would not be fully made. Factors like mental or physical illness, or spousal abuse, tend to weigh in favor of a spouse seeking relief.

Again, spouses who are targeted by the IRS for misstatements or underpayments should always work with an experienced tax attorney to ensure they are able to confidently navigate the investigation, and that their rights are protected should they be faced with criminal charges.

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